Saturday, January 30, 2010

For those understandably daunted by the 396-page brick that is the full Survival+, I've put together a short 134-page Primer.

Since not everyone wants to chew through a 396-page book, I've assembled an introduction I've titled Survival+ The Primer.

Why I created Survival+ The Primer

Reader feedback persuaded me that a 396-page book is a justifiably daunting prospect for many, and so I decided to create an Introduction to Survival+ that is only a third the length (48,000 words, 134 pages) of the full version. It is not a summary--there is simply no way to summarize 396 pages into 134 pages--butThe Primer serves to introduce key Survival+ concepts and principles for a modest cost: $5.95 for the ebook or $9.95 for the print version.

Those seeking a quick read will find The Primer fits the bill. It is both a stand-alone work and an introduction to the full version. There are four ways to get a copy:

I have no idea if the world needs a short version of Survival+ or not, but the only way to find out is to publish it and see what happens. My own guess is that it might fill a niche for those who would like to give another reader something shorter and therefore more readable than the full version.

Survival+ The Primer is an introduction to many of the key concepts of the full 140,000-word book. While it is impossible to distill all the ideas into a short primer, we can at least address these key understandings:

-- The status quo of a rapidly expanding Savior State in thrall to global cartels is heading for inevitable insolvency

-- Though the devolution and insolvency of the debt-based status quo is driven by large-scale forces, the opportunities will be small-scale and open to individuals, families and communities.

-- Though the forces at work are global, we are not powerless. As individuals, we have the power to create our own transformation.

This can be expressed very simply: we are what we do every day.

In a very real way, we "vote" for our health by what we choose to put in our mouths three times a day, just as we "vote" on which kinds of food and companies we support when we buy the food.

Every purchase we make is a "vote" for or against a high-cost, debt-serf lifestyle that serves the interests of Power Elites and cartels.

Every hour we spend "consuming" mass media "entertainment" is a "vote" in favor of passivity, powerlessness and propaganda. Every time we turn off the mass media we are "voting" for our own productivity and well-being.

Every time we offer our effort to others in voluntary social networks, we "vote" for the reciprocity and trust which are the foundations of sustainable communities.

Every vote for the incumbent politician is a vote for a doomed status quo that is in servitude to Power Elites (with rare exceptions).

Readers of my weblog often ask for a "checklist" of specific recommendations: jobs to seek, the best locales to move to, etc. But no checklist can apply to us all; we're each a unique mix of interests, talents, history and family/social networks. The only person who can sort out what's best for you is you.

What I can offer is a set of "first principles" which can help guide our analysis and decisionmaking in the Great Transformation ahead.

If it flops, oh well, failure is our most valuable experience... and yes, eventually I will look into the ePub format which Apple will use for its new iPad reader.

Housekeeping notes:

1. My shipment of books finally arrived. After a 3-week comedy of errors and mishaps, my shipment arrived yesterday and I started sending out signed books to contributors. Thank you for your patience!

2. There are at least two remaining U.S. manufacturers of laundry appliances: Speed Queen and Staber Industries. Thank you, Peter C., for bringing this company to my attention.

3. Due to my currently insane workload, it is impossible for me to reply to emails individually for awhile. To those of you who can work 65-70 hours a week, week in, week out, month in, month out, while retaining your sanity and health, I commend you. Alas I am a mere mortal, with a livelihood to maintain beyond this blog and my writings, and non-stop workloads of 65+ hours a week break me. I am writing this at 4 a.m. having slept 8 hours in the past 48 hours, and that is unsustainable, at least for me.

Your correspondence is an essential part of the collective intelligence of this site, and of my own continuing education. So please know that your email will be read and appreciated even though I can only issue this blanket statement of acknowledgement. Please accept my apologies for the absence of a personal response.

4. If you send me a report/commentary/link, please consider posting it to the DailyJava.net forum as well. I can only reprint about 1% of the emails I receive, so please do other readers a favor by logging into the forum and posting your informative email on a thread. It only takes a moment to register; select an appropriate thread, or go to "Charles Smith" and select the "daily blog" thread as a default.

5. If you haven't visited the forum, here's a fun place to start. Click on the link below and then select "new posts." You'll get to see what other oftwominds.com readers and contributors are discussing/sharing.

DailyJava.net is now open for aggregating our collective intelligence.

Friday, January 29, 2010

Let's begin by comparing two charts from the Centers for Disease Control (CDC) which depict obesity levels on a state by state basis: the first in 1985 and the second, a generation later in 2008.

Clearly, obesity has exploded into a pandemic in just a single generation.

Interestingly, all the usual explanations--the rise of fast foods, women joining the workforce and thus the decline of the home-cooked meal and the decline of physical labor jobs--fail to explain the dramatic increase for the reason that all these conditions were already present in 1985.

Women had already joined the workforce en masse, fast-food outlets were already on every corner and jobs requiring hard physical labor had already dwindled to a small percentage of our post-industrial, service-dominated economy.

So what is different between 1985 and the present? At least one factor is the increased consumption of sugary beverages: soda, specialty coffees, iced teas, and "juices," both the fake variety (colored sugar water with 10% actual fruit juice) and 100% juice.

As a consequence, consumption of fructose (both "natural" and high-fructose corn sweetener, HFCS) has skyrocketed.

Reader R.W. recently submitted this account of his own family's experience, and what they discovered by consulting with one of the nation's leading experts in Pediatric Endocrinology.

I’ve attached a YouTube film of a lecture by Dr. Robert Lustig, head of Pediatric Endocrinology at UCSF Medical School. This is an explanation of the biological--and political--mechanism that causes obesity and Type 2 diabetes, and why they’ve become an epidemic.

We were fortunate to find Dr. Lustig when my younger son, Pat was an adolescent. Pat was a very heavy boy who gained weight despite being vigorously active (for example, he played water polo year round) and really not eating that much. I finally persuaded Pat’s pediatrician that there was something wrong with the boy’s metabolism. Pat’s blood test showed he had cholesterol and triglyceride counts that would be extreme for an obese 60-year-old--into the high 300’s.

There were no pediatric endocrinologists in our area at that time, so we were sent to UCSF. Dr. Lustig enrolled Pat in a study which I think is still ongoing. The upshot: cut out all fructose, and obesity and all its symptoms subside.

Pat, now 20, weighs 25 pounds LESS than he did in the 8th grade, although he is six inches taller. People literally do not recognize him. It is a very gratifying and amazing transformation. It was simple, but not easy. Pat worked very hard, and for a while was assisted with metformin. (He is now off the drug, and shows no ill effects or relapsed weight gain or high cholesterol or triglycerides.) But mostly it was about shunning all fructose, especially in drinks.

Fructose is addictive for the same reasons, by the same mechanisms, and producing many of the same pathologies as alcohol, as Dr. Lustig explains in the lecture. One of his catch phrases is: “Fructose is alcohol without the buzz.”

It’s 90 minutes. Stick with it. It’s a little dense in spots, but overall, it is a compelling story. Dr. Lustig puts it all in context. I know he and Michael Pollan are aware of each other, though when I asked him he said they haven’t had any formal collaboration. But their views of our food delivery system are totally aligned.

I’m hoping that once you see this, you will feel that it deserves a wider audience.

Thank you, R.W., for sharing your experience with us. It is sobering indeed, but hopeful, as the path to better health is within reach of everyone: restrict consumption of fructose, including "juices," and drink plain water and eat actual fruit instead.

Housekeeping notes:

1. My shipment of books finally arrived. After a 3-week comedy of errors and mishaps, my shipment arrived yesterday and I started sending out signed books to contributors. Thank you for your patience!

2. There is one remaining U.S. manufacturer of laundry appliances: Speed Queen. Check them out if you're in the market for a washing machine. Thank you, readers, for bringing this company to my attention.

3. If you send me a long email, please consider posting it to the forum as well.I can only reprint about 1% of the emails I receive, so please do other readers a favor by logging into the forum and posting your informative email on a thread. It's easy!

4. If you haven't visited the forum, here's a fun place to start. Click on the link below and then select "new posts." You'll get to see what other oftwominds.com readers and contributors are discussing/sharing.

DailyJava.net is now open for aggregating our collective intelligence.

Thursday, January 28, 2010

The propaganda machine promises us we have plentiful oil and natural gas for 100 years. They neglect to mention the cost.

Every announcement of a "new oil field with 1 billion barrels of oil" unleashes a flood of MSM propaganda about the incredible abundance of oil and natural gas.

My objections to the propaganda are founded on three questions:

1. Did anyone do the math? 1 billion barrels sounds impressive until you do some simple multiplication and discover that is less than what the U.S. consumes every two months.

So boo-yah, 1 billion barrels. (Here's the math: 19 million barrels a day (MBD) X 30 days equals 570 million barrels a month.)

Recent industry stories claim there might be as much as 15 billion barrels in new discoveries in the Gulf of Mexico. Sounds promising, but if we multiply the global consumption of 85 million barrels a day by 30 days, we get 2.5 billion barrels. So 15 billion barrels in new discoveries works out to six months' supply at current consumption.

2. Did anyone calculate the declining production in existing wells which must be offset to keep production at 85 MBD? The MSM /Wall Street propaganda never mentions that the super-giant fields in Mexico, Saudi Arabia and the North Sea are all declining at about 4.5% or more per year. So massive new production must be brought online just to maintain current production.

3. How much will it cost to extract, transport and process this new oil and gas?

We should note once again that Peak Oil is not just about oil running out--it's about the disappearance of cheap oil. At $300/barrel, there may well be quite a bit of oil left. But what will $300/barrel oil mean to the global economy?

Let's take a close look at what kind of oil and gas is being discovered. It turns out it's very deep and poses engineering difficulties glossed over in the MSM propaganda. Frequent contributor U. Doran submitted this link from TOD (the oil drum).McMoRan Davy Jones Gas Discovery

McMoRan Exploration Company has made a significant discovery in the U.S. Gulf of Mexico that may contain 2 trillion cubic feet (Tcf) of natural gas reserves. The well was drilled in 20 ft of water 10 miles south of the Louisiana . The discovery by McMoRan (operator) and partners Plains Exploration & Production Company and Nippon Oil Corporation is very deep (28,125 to 28,262 feet drilling depth) but with excellent quality

Some analysts have said that this discovery proves that concerns about peak oil and gas are unfounded. This is common whenever important discoveries are announced. It is, therefore, worthwhile to place the Davy Jones discovery in the context of broader petroleum supply, demand, cost and timing factors. While 2 Tcf is a lot of gas, it is about equal to one month of U.S. consumption during peak winter months, and we currently have an over-supply of natural gas that may persist for some time.

This “down dip” Wilcox play has been ignored by drillers until McMoRan’s test because structural complexity and deep targets involve high risk, expensive exploration.

It is worth mentioning that the announced discovery is based on sketchy information from well logs and is does not represent an actual flow test. The reason for this incomplete data is the extreme depth, pressure and temperature of the Wilcox reservoir in this well.

Bottom-hole pressures may be as high as 25,000 pounds per square inch, by far the highest pressures known in Gulf of Mexico wells, and almost 10 times the rocket engine chamber pressure required for spacecraft liftoff. While not specifically mentioned, reservoir temperature is probably considerably more than 400 degrees Fahrenheit. Gas has never been produced at these temperatures and pressures, and may present engineering obstacles. In addition, gas reserve volumes will shrink at surface conditions. There is also a possibility that the gas will contain carbon dioxide, which will reduce the volume of commercial gas and present a disposal problem.

So not only is this well incredibly costly, the actual results are unknown. The conditions are extreme, to say the least; this won't be cheap natural gas, if it can be extracted at all with today's prices.

Most of the comments claimed I was off-base, that fraccing would create abundant cheap gas forever, etc., but one reader self-identified as Chemimagineer wrote a much more informed and skeptical response:

About 2 years ago, Ultra Petroleum stated its production costs at $1.88/MSCF in Wyoming. They along with Haliburton have pioneered the frac techniques that are currently being used. They did this for good reason as some of the reservoir columns are along 1 mile thick!!! I have read claimed costs of production from Ultra's low at $1.88 to around $4.00/MSCFD (1000 Standard Cubic Feet Per Day).

In any case, at current prices the new shale discoveries are in the Black -- but not be a lot. The production drops or decline have been reported for some of the thick zones from 50% in 6 months to 95%. However, not all techniques are created equal and who knows just what all these folks are doing. The Louisiana Haynesville and Bossier City are in the 250 ft to 300 ft thick range which sure gives lots of gas to go after -- then it is a case of liberating it at the wellbore and gaining access to the gas deep into the reservoir. Because of these very thick layers and using horizontal drilling techniques, some of these fracs have 10-15 stages -- very, very expensive.

In any case, this is not cheap gas, but if rates stay up after fracing, the payoff can be very good. But spending $5-6 million per well to bring them on-line is not chump change or for the weak at heart. Some WILL fail but I believe they will be economic as long as the producing company has enough in its war chests to get it figured out -- but it may take a few wells and a variety of well completion designs. Hope this helps a bit.

In other words, nobody really knows what costs these outfits are incurring, or how steep their decline rates are. The hype is all positive, but then the real world isn't always so accommodating.

Here are some other excellent blogs on the subject of natural gas and peak oil:

Lastly, here is my speculative chart from 2008, calling for a spike in the price of oil followed by a "head-fake" drop. We got the spike last summer to $147, and while prices rose to $80/barrel recently, they may decline to as low as $20/barrel when the global recession really takes hold in 2011-2013.

As demand recovers, it will climb above falling supply, and prices will quickly climb to the stratosphere. Gas and oil 28,000 feet down far from shore and facing tremendous pressures and other engineering challenges will not be cheap to extract, transport or process. No amount of supply will lower those costs.

Here are a few books on the material matters conveniently ignored by the MSM:

Wednesday, January 27, 2010

Analysts worry about demographic trends, but the solution is straightforward: we all work longer as our societies age, and we encourage opportunities in the developing world.

Are demographics destiny? In the sense demographics force choices to be made: yes.

A recent article in Foreign Affairs tackles the subject from the point of view that is't not the raw increases or decreases in population which matter but the distribution of aging and youthful populations and the income declines caused by shrinking, aging populations in the developed nations.

A previous Foreign Affairs article in 2004 argued along similar lines that a shrinking population would trigger economic decline: The Global Baby Bust.

Standard demographics always makes the key cognitive error of extrapolating current trends into the future even as the fundamentals are changing. For instance, The U.N.'s "World Population Prospects" assumes the global human population will stabilize in 2050 at around 9.15 billion people, and that the global economy will grow faster than the population, at 2-3% annually. (Current global population is 6.8 billion.)

So the U.N. reckons the world can add another 2.3 billion humans with no real problem, assuming the planet avoids catastrophic climate change.

Um, has anyone at the U.N. heard about soil depletion, drought, peak oil and falling water tables? There are plenty of reasons short of catastrophic climate change to reckon that the planet is already past carrying capacity and that any relatively modest disruption in global grain or fossil fuel supplies in conjunction with existing drought/ water shortages could trigger widespread starvation.

But setting those issues aside for the moment, let's examine the four megatrends as outlined in the Foreign Affairs article:

1. the demographic weight of the developed world will decline by 25% (i.e. the share of the world's population who reside in developed countries will decline), shifting economic power to the less-developed nations

2. the labor pool in the developed nations will age and shrink, lowering economic growth and creating demand for younger immigrants

3. the population growth will occur in poorer, younger nations

4. for the first time in history, most of the world's population will be urban

The author's solution is for the developed nations (Northeast Asia, North America, the EU) to spur their birth rates via tax incentives. His second suggestion is to become more open and friendly with the nations whose populations are exploding, to facilitate shifting 100 million poor people into Western countries to perform the work they will need done because their populations are aging rapidly.

I cannot find much to agree with in this lengthy piece. Its premises seem completely uninformed about the world beyond nice little extrapolations on graph paper.

The author seems to think the relative economic decline of the developed countries is a disaster as the relative influence of the West/Korea/Japan will decline as their share of the global economic pie shrinks.

Isn't this the same error of extrapolating current "cheap abundant oil" and plentiful water/soil into the future? What evidence is there that the "middle class of the developing world will soon exceed the entire population of the West"? Exactly how large will the middle class of any nation be once oil and food become pricey/ unavailable?

The entire premise of limitless growth of oil, grain and other material wealth is so detached from reality that it qualifies as a form of psychosis/insanity.This article, and others like it, blithely assume the world can add 2 billion middle-class consumers without a hitch.

The big problem to these analysts is that the developed world will be largely populated by retired people, so the demographic "project" is to bring in a couple hundred million young poor people anxious to work as maids, servants, streetcleaners, etc.

Have any of the analysts visited Europe lately and observed the simmering conflicts between the poor, young Muslims who are already in the EU and the wealthier non-Muslim residents? Is this deep cultural divide some sort of secret?

Have the analysts considered the much simpler solution, which is that as people live to 85 and beyond, that they will have to work until the age of 70-75 instead of retiring at 55 or 67? Yes, there will always be a place for immigration from poorer to wealthier countries, but does anyone seriously believe that moving 100 million poor people into Europe (leaving 2.9 billion other poor people behind) is any sort of "solution" to a natural aging of developed populations?

Wouldn't the better goal be to create more opportunities in the undeveloped countries rather than create social turmoil by mixing populations on a vast scale simply because one group is younger and poorer, as if this is all that counts? Why not start demanding transparency, a reduction in corruption and the introduction of civil liberties and free open markets in these less-developed nations? Those are the reasons they are suffering from poverty; shifting the most ambitious 5% of their populations to the West is not helping the 95% left behind.

(We could start by setting a good example, i.e. restoring our own financial transparency and civil liberties.)

This article's "solutions" are nonsensical. So the developed world's relative share of global economic power declines; fine, it's about time. The developed world's populations are aging: no big deal, as lifespans increase then so should the time spent in the labor force. Having a job (even a part-time one) is healthy; it isn't some awful evil that should be shunned.

What really stuns me is how deaf these analysts are to the "end of work" in the developed countries; as I have written here before, a strong case can be made that the U.S. will lose another 25 million jobs in the next decade, on top of the 8 million it has already lost. We as a nation will be dividing up paid work amoung the millions of unemployed here; there will be no need for tens of millions of immigrants.

What will change is the developed-world's expectations of retiring at 55 and lounging around for 30 years on the golf course and cruise ships, breaking up the endless leisure with numerous visits to medical specialists paid for by the Savior State.

The entitlement programs in all developed nations are doomed regardless of what modifications are made to taxes and benefits; the End of Work simply hastens the collapse of the Savior State.

The fantasy of working for 30 years and then retiring for 30 years, all expenses paid, is now toast, for structural reasons which are only partially demographic.

Tuesday, January 26, 2010

The Wal-Mart Model of Self-Destruction is simple: low prices are all that matters.

The devolution of the American citizen into a self-destructing consumer starts with the devolution of a value system into an monomaniacal obsession: "the only thing that matters is the lowest price," regardless of the true costs or consequences.

The propaganda of marketing has so hollowed out American culture that most citizens cannot recall a time that "Consumerism" wasn't the unofficial religion of American society. And what is the First Commandment of "consumerist religion"? The lowest price is all that matters.

Quality doesn't matter; we're going to move/throw it away anyway.

Who made it doesn't matter. The idea that you might pay more to keep your neighbor employed is akin to worshipping the Devil: all that matters is the lowest price.

The hidden costs to "the lowest price" don't matter; the environmental costs (conveniently passed off to the developing world) don't matter, nor do the costs of subsidizing the purveyors of "the lowest prices, always." (see below)

The health consequences of consuming low-quality food don't matter, just the low price.

The mechanisms used to obtain the lowest price don't matter; dynamite the fish, we don't care, just get us the lowest prices. Chop down the rain forests, we don't care, just get us the lowest price hardwoords and cheapest beef.

The consequence of this mono-mania is that all other costs and consequences are ignored/not priced in unless government shoves it down the retailer/manufacturers/consumers' throats.

I recently helped a friend research buying a small portable washing machine--the kind for small apartments which can be rolled to the kitchen sink and connected to the kitchen faucet, then returned to storage elsewhere.

There are few manufacturers due to the small market: Haier, the Chinese manufacturer, sells a model for under $300. Bosch (German) sells one for around $1,200, and Kenmore (Sears) sells a Whirlpool-made model for about $700.

My friend wanted to buy an appliance that would last, and one made in the U.S., and I recommended the Kenmore based on my own experience with our 5-year old (U.S. made) front-loading Kenmore washer. So we go to the Sears outlet to look at the portable washers and discover they're made in Brazil. In other words, there are no household appliances of this type made in the U.S. or even in North America. China and Germany make portable household washers but the U.S. does not.

The sales clerk, who told us she'd worked there for over 12 years, then informed us that customers had been complaining about Whirlpool's switch from an old-style dial for turning the washer on and off to a digital display which had the nasty habit of failing after a year or two.

Online complaints posted by other customers revealed that the portable washers' digital control boards failed often-- one gent said he'd bought three in three years--and the repair cost $375 each time.

In other words, quality doesn't matter. The digital display probably contains a few dollars or less of actual electronics; yet when it fails, it costs more than the Chinese-made washer to have it repaired.

As a result of this sharp decline in quality and high probability of costly repairs, the sales clerk recommended my friend buy the $129 extended warranty.

So the U.S. brand (made in Brazil), with the apparently necessary extended warranty and California state excise tax (almost 9%) is roughly triple the cost of the Chinese appliance, which cannot be serviced should it break down because Haier has no local service center.

Note to Whirlpool/Sears: do you actually read your customer feedback? If you did, perhaps you'd offer two models: a U.S.-made one with a mechanical dial which costs X dollars and carries a 10-year warranty because you manufacture it to standards you had 20 years ago, or perhaps as recently as 5 years ago, and a second low-quality one with a guaranteed-to-fail digital control board made overseas and shipped to the U.S. for X dollars (presumably lower than the quality appliance but still twice the cost of the Haier.)

Now enable consumer feedback on your two models and see which one achieves a profitable reputation and sales history.

If no one buys the higher-priced, high quality appliance which actually costs much less over its lifetime than cheap throwaways, then the American "consumer" deserves what he/she gets: low quality and high lifetime costs (i.e. everything must be repaired or replaced constantly).

If you can no longer manufacture an appliance that lasts for 20 years (and hence it is safe to warranty it for 10 years), then you deserve to go out of business.

An obsession with "the lowest price" without regard for any other issues, consequences or hidden costs is an act of self-destruction. We as a nation have absorbed the Wal-Mart model of self-destruction, and so we blindly seek the lowest price even as it guts the environment, guts local industry, guts civic centers and ends up costing us more once the total lifetime costs are tallied (all those taxpayer subsidies for "cheap" goods and retailers and high life-cycle costs for crappy goods which don't last.)

Everything we buy or don't buy is a "vote" for or against quality and low lifetime costs.

Is "convenience" and "low prices" really all that's important? Isn't it odd that we spend considerably less on food as a percentage of income than we did 30 years ago but our health has deteriorated and people are complaining about the "high cost of food" even as they rarely eat at home any more? Are "low prices" really that wonderful for the nation? Or did we "get what we paid for," i.e. low quality for low prices, with extremely high-cost consequences of that monomanical obsession with the lowest upfront price?

Maybe we should require that all the costs associated with the item be included in the retail price. Maybe we'd realize the "lowest price" is actually the costliest option we could possibly have taken.

Monday, January 25, 2010

Readers regularly ask me to weigh in on the question "should I buy a house now or not?" Here are a few key considerations.

Has the housing market bottomed? Is now a good time to buy a house if you've been waiting patiently for years? I receive queries like this on a regular basis, and my responses do not take the form of advice--after all, how can anyone know the reader's full financial/ family situation except the reader? And how can anyone outside the area possibly know the many variables of the local real estate market?

The only thing I can offer is a context for analysis and decisionmaking.

Let's start with the big question: Is this the bottom? Despite a very sharp bounce in sales and prices in some beaten-down markets like San Diego (please seeCalifornia Housing Forecast for particulars on the multiple bidding environment which took hold there in 2009), the short answer is "probably not, based on bubble symmetry and the fundamentals of supply and demand."

Let's stipulate two points:

1. Housing/real estate was a classic speculative bubble.

2. All speculative bubbles tend to track a symmetrical pattern.

Simply put: if the bubble took seven years to reach its blow-off top, then its decline will typically take a similar length of time as prices fully retrace to pre-bubble levels. Here are some charts that illustrate the point.

This is the Nasdaq dot-com speculative bubble, which traced out a sharp rise and decline somewhat like the Tulip Bulb Mania and other previous speculative bubbles. The key feature to note is how eager "bottom fishers," still caught up in the false promise of "easy wealth in real estate/tulip bulbs/the Internet" etc. jump in far too early, creating brief spikes in demand and thus price.

Then supply once again overwhelms demand, which falters, and prices resume their decline. As for falling demand:

As for supply: it is common knowledge that hundreds of thousands of homes are currently in the limbo of "shadow inventory"--homes the lenders won't foreclose for fear they can't be sold, homes held off the market by owners who are deeply underwater on their mortgages, etc. As soon as demand appears, then supply rockets up as those anxious to sell move properties from the "shadow inventory" into the market.

The other feature to note in this chart is that the dominant speculative belief (in this case, that "real estate is the foundation of easy wealth creation") takes years to expire.

This is a chart I prepared as the housing bubble climbed toward its ultimate peak in 2006/early 2007. It suggests that the next leg down in still-overpriced markets is about to begin, and that the final bottom will probably not be reached until the 2013-2014 time frame.

So the answer to the question "what is fair value?" is consistent: pre-bubble prices, that is, whatever the house fetched in the 1994-7 timeframe.

Here we see that national home prices have already retraced to 2002 levels--about halfway down the slope to a full retrace. Once again we see that bubble symmetry suggests the final bottom will not be reached until 2013-2014.

In some once-hot areas, prices have already returned to pre-bubble valuations, or even lower. If this metric has been reached, then we need to ask these additional questions about any potential purchase:

1. Does the property have any inherent value, i.e. is it close to centers of jobs and commerce, have deep soil and good water, solidly constructed, etc.? A poorly constructed McMansion sitting forlornly in an exurban development that's unoccupied and falling to pieces, far from jobs and any social life, is doomed to be bulldozed. Its location and construction served no purpose except speculation. Since it is poorly built, then even a price of $1 is too expensive because it will be a money pit to maintain/repair.

2. Is the total cost of ownership--mortgages, insurance, property taxes and routine maintenance expenses--substantially lower than renting an equivalent home? One reader recently purchased a home with a substantial down payment with the net result that his monthly housing costs (not counting any large maintenance expenses like a new furnace or roof, of course) dropped to below $600/month compared to $900/month for the house he was renting.

The danger here is that as the supply of rental homes and apartments rises, rents are already dropping in any locales. That is, rent is not a fixed number but a moving target. Rents may decline for years if demand remains lower than supply.

On the other hand, areas close to jobs and commerce might see rising rental demand as people try to move closer to jobs, schools, social life, etc. as rents in these desirable areas decline.

3. Can you afford to have the capital (down payment) tied up in illiquid real estate? Given the financial uncertainties, it might not be wise for anyone to dump all their cash savings into a house which cannot be readily sold should some other pressing need arise.

4. Are your sources of household income stable and not subject to the whims of Corporate America's penchant for transfers? There are few better ways to churn through a fortune than to buy a house in a disintegrating market and then be forced to sell due to a Corporate relocation, then buy another home near your new assignment. Losing money every month supporting two homes, both of which are losing value and neither of which can be sold for their purchase price--this is a financial nightmare to be avoided at all costs.

5. Can the mortgage, taxes, insurance and maintenance be paid by one income in a two-income household? Job security is a relative term as corporations shed jobs, small businesses fold and local government finally faces the double-bind of declining tax revenues and increasing pension costs. Thus it is prudent to align housing expense such that one income can cover the bills if someone in the household loses their job.

For renters, the loss of one income can be met by moving to a cheaper rental. A homeowner has no such flexibility.

Bottom line: what are the consequences if housing continues declining for 3-4 more years? If housing in a locale has already fully retraced to pre-bubble valuations, then the rest of the questions can be used to construct a decison tree.

In an economy which is disintegrating on multiple levels, it's prudent to ask "what if?" questions and think through "worst-case scenarios" before committing capital and making a long-term commitment to a property.

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